'Taper Tantrum' may hit inflation in emerging markets: Goldman Sachs

Indian policymakers could be forced to hike rates, says the firm's study

Emerging market belonging to emerging markets including India are likely to be impacted on account of the United States Federal Reserve’s decision to scale back its quantitative easing program.

The $10 billion reduction in its monthly liquidity injections starting in January will affect inflation in these countries despite the positive impact that currency depreciation would have on their external imbalances, according to a Goldman Sachs special macro research issue entitled ‘2013 update, and a peek at 2014.’

“…we worry that the weaker currencies required to correct external imbalances could complicate matters for policymakers in countries where inflation is already running above target (think India, Brazil, Turkey, South Africa and Indonesia),” said the report dated December 18.

“Many EM currencies have experienced substantial depreciations since we published in March, in large part triggered by better DM growth and the markets’ increasing expectations that the US Fed would start tapering its asset purchases sooner rather than later – the so called “taper tantrum”…We generally view this development positively, as such depreciation (and in many places much more depreciation) will be required to correct large external imbalances…” it said.

The report noted that the increased pressure on inflation could leave policy makers with little option but increase rates.

“…they may be forced to tighten policy, which could harm economic growth and put substantial stress on domestic borrowers that had built up debt in recent years. Indeed, Brazil, India, and Indonesia have all begun a rate hiking cycles this year amid somewhat shaky macro backdrops,” it said.